Reply #6: Shrinking Money Supply Dampens Inflation Fears

[ozymandius]

The Federal Reserve stands accused of risking high inflation by recklessly printing too much money. But as Fed rate setters meet in Washington on Sept. 22-23, they won't see an excess of money sloshing around. Just the opposite. Paradoxically, the latest statistics show a shrinkage in the broadest measures of money.

The upshot: Members of the rate-setting Federal Open Market Committee are likely to announce on the afternoon of Sept. 23 that they are sticking with their stimulative monetary policy. Inflation, while always a risk, remains more of a long-term threat. The economy is so soft and the banking system is so weak that deflation remains a clearer and more present danger.

To fight the recession, the Federal Reserve has vastly increased the amount of reserves that banks have on deposit at the Fed. In a healthy economy, banks would take advantage of those reserves to increase their lending. Instead, they're hoarding the money, so the Fed's loose monetary policy isn't resulting in more loans. It's the process of lending that expands the amount of money in the economy.

http://www.businessweek.com/bwdaily/dnflash/content/sep2009/db20090921_752884.htm